Finding the Gains in Global Trade

By Matt Gersper and Marisa Brown On Aug 13, 2007

Evergreen, CO and Houston, TX — August 13, 2007 — Global trade remains one of the last corporate frontiers where upgrading and optimizing business processes can drive very significant financial and operational gains, giving corporations an additional strategy to create competitive advantage and add significantly to their bottom line. Yet standardized metrics for measuring performance in global trade processes have eluded this $10 trillion industry leaving business executives in the dark.

There has been a quiet evolution from domestic sourcing of raw materials from domestic suppliers to increasingly complex, global supply chains. The size and financial significance of this shift has caught many executives by surprise. Cross-border global transactions have grown from $3 trillion in 1990 to $10 trillion in 2007 and, according to a recent McKinsey report, are expected to grow to more than $70 trillion by 2025.

In the face of increasing government regulations and with logistics expenditures at a staggering 9.9 percent of US gross domestic product (GDP) and rising, only 7 percent of executives are fully satisfied with their global trade programs. The other 93 percent may be shocked to learn that error rates in global trade processes often exceed 20 percent. In a recent thought experiment conducted by Global Data Mining (GDM) and the member-based non-profit research and education organization APQC, it was estimated that more than 90 percent of all international shipments have mismanaged "hand-offs" that slowed the transaction and added "hidden" costs to the importing company.

Imagine that your organization has the ability to precisely measure performance in eight major "hand-offs" in your international supply chain. 1) Once a purchase order is created, your systems can measure if the supplier filled the order complete and on-time. 2) It can measure if the foreign in-land transportation delivered the goods the to foreign port on-time. 3) The system can track the activity in the foreign customs process and determine that the goods cleared with no delays. 4) You can measure if the international transportation delivered the goods to the domestic port on-time. 5) The system can measure if the goods cleared domestic customs with no delays. 6) You can measure if the domestic in-land transportation delivered the goods to your warehouse on-time. 7) The system tracks if receiving was complete and damage free. 8) And finally, your system can report if all customs declarations were complete and accurate creating no post-entry consequences.

Further, imagine that your company-wide performance across all eight of these major supply chain activities averaged 80 percent. In other words, 80 percent of the time, the activity was completed on time and according to expectations set by your company. The result of this level of performance across 10,000 transactions would be that only 1,678 transactions would be completed according to expectations and that 8,322 would incur some problem or problems slowing the transaction and adding unintended costs to your organization. We call the performance metric across these eight supply chain activities The Supply Chain Performance Index. The formula reads:

80% * 80% *80% *80% *80% *80% *80% *80% = 16.78%

A June 2007 article by the Global Economy reported that "in the first quarter of 2007, only 47 percent of container vessels globally arrived at the ports on time, the lowest level on record."

When we insert this data into our thought experiment, the level of performance across 10,000 transactions would now have more than 9,000 or 90 percent of the shipments with some problem or problems slowing the transaction and eroding expected profits.

80% * 80% *80% *47% *80% *80% *80% *80% = 9.65%

What could possibly cause such poor performance? Each stakeholder is acting with incomplete information and in self-interest rather than in the best interest of the supply chain itself, acting independently rather than collaboratively. Other factors that contribute to mismanaged supply chain hand-offs include language differences between the stakeholders, cultural differences, differences in industry jargon, breakdowns in communication and failure of the importer to set, and control expectations for each activity within the supply chain. Inefficient supply chains cost corporations millions of dollars in unexpected "hidden costs" severely impacting company profits.

Financial opportunity also abounds on the plus-side of managing an international supply chain by effectively managing the proliferation of Free Trade Agreements, improving sourcing options and implementing new supply chain finance programs for international suppliers. Leading executives are beginning to use data mining and metrics to identify significant financial and operational opportunities within their global supply chain. One leading Industry analyst, Beth Enslow of the AberdeenGroup, and GDM recently collaborated on an extensive data mining project for the International Compliance Professionals Association (ICPA). The project included five Fortune 500 companies and identified more than $500 million in potential savings.

In a separate Aberdeen study (the CFO's Agenda for Global Trade Benchmark Report), Beth Enslow concluded, "A $1 billion company can free $10 million to $40 million in cash by better controlling its basic global trade processes." How large is the opportunity for your company?